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BRT Apartments Corp. - Quarter Report: 2012 December (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2012

 

OR

 

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 001-07172

 

BRT REALTY TRUST

(Exact name of Registrant as specified in its charter)

 

Massachusetts

 

13-2755856

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

60 Cutter Mill Road, Great Neck, NY

 

11021

(Address of principal executive offices)

 

(Zip Code)

 

516-466-3100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.

 

14,191,887 Shares of Beneficial Interest,

$3 par value, outstanding on February 5, 2013

 

 

 



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

Table of Contents

 

 

 

Page No.

Part I - Financial Information

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets — December  31, 2012 and September 30, 2012

1

 

 

 

 

Consolidated Statements of Operations — Three months ended December 31, 2012 and 2011

2

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income — Three months ended December 31, 2012 and 2011

3

 

 

 

 

Consolidated Statement of Equity — Three months ended December 31, 2012

4

 

 

 

 

Consolidated Statements of Cash Flows — Three months ended December 31, 2012 and 2011

5

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

Part II — Other Information

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

27

 

 

 

Item 6.

Exhibits

28

 



Table of Contents

 

Part 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

December
31, 2012
(Unaudited)

 

September
30, 2012

 

ASSETS

 

 

 

 

 

Real estate properties net of accumulated depreciation and amortization of $6,072 and $4,787

 

$

255,422

 

$

190,317

 

 

 

 

 

 

 

Real estate loans, all earning interest

 

71,257

 

37,096

 

Deferred fee income

 

(1,056

)

(512

)

Real estate loans, net

 

70,201

 

36,584

 

 

 

 

 

 

 

Cash and cash equivalents

 

32,613

 

78,245

 

Restricted cash — construction holdbacks

 

49,597

 

55,252

 

Available-for-sale securities at fair value

 

1,226

 

1,249

 

Deferred costs, net

 

12,449

 

12,337

 

Prepaid expenses

 

5,110

 

5,978

 

Other assets

 

5,725

 

5,994

 

Total Assets

 

$

432,343

 

$

385,956

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages payable

 

$

214,810

 

$

169,284

 

Junior subordinated notes

 

37,400

 

37,400

 

Accounts payable and accrued liabilities

 

4,611

 

4,298

 

Deposits payable

 

2,160

 

2,108

 

Deferred income

 

25,848

 

25,848

 

Total Liabilities

 

284,829

 

238,938

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

BRT Realty Trust shareholders’ equity:

 

 

 

 

 

Preferred shares, $1 par value:

 

 

 

 

 

Authorized 10,000 shares, none issued

 

 

 

Shares of beneficial interest, $3 par value:

 

 

 

 

 

Authorized number of shares, unlimited, 13,473 issued in both periods

 

40,420

 

40,420

 

Additional paid-in capital

 

165,451

 

165,258

 

Accumulated other comprehensive income

 

344

 

356

 

Accumulated deficit

 

(73,889

)

(72,585

)

Total BRT Realty Trust shareholders’ equity

 

132,326

 

133,449

 

Non-controlling interests

 

15,188

 

13,569

 

Total Equity

 

147,514

 

147,018

 

Total Liabilities and Equity

 

$

432,343

 

$

385,956

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

Rental and other revenue from real estate properties

 

$

5,640

 

$

768

 

Interest and fees on real estate loans

 

1,879

 

2,252

 

Recovery of previously provided allowances

 

422

 

7

 

Other income

 

310

 

127

 

Total revenues

 

8,251

 

3,154

 

Expenses:

 

 

 

 

 

Interest expense

 

2,946

 

467

 

Advisor’s fees, related party

 

374

 

171

 

General and administrative—including $205 and $279 to related party

 

1,863

 

1,674

 

Property acquisition costs

 

878

 

 

Operating expenses relating to real estate properties

 

3,146

 

786

 

Depreciation and amortization

 

1,287

 

184

 

Total expenses

 

10,494

 

3,282

 

Total revenues less total expenses

 

(2,243

)

(128

)

Equity in earnings (loss) of unconsolidated ventures

 

61

 

(75

)

Loss on sale of available-for-sale securities

 

 

(18

)

Gain on sale of loan

 

 

3,192

 

(Loss) income from continuing operations

 

(2,182

)

2,971

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

Gain on sale of real estate assets

 

 

490

 

Net (loss) income

 

(2,182

)

3,461

 

Plus: net loss attributable to non- controlling interests

 

878

 

413

 

Net (loss) income attributable to common shareholders

 

$

(1,304

)

$

3,874

 

 

 

 

 

 

 

Basic and diluted per share amounts attributable to common shareholders:

 

 

 

 

 

(Loss) income from continuing operations

 

$

(.09

)

$

.24

 

Discontinued operations

 

 

.04

 

Basic and diluted (loss) income per share

 

$

(.09

)

$

.28

 

 

 

 

 

 

 

Amounts attributable to BRT Realty Trust:

 

 

 

 

 

(Loss) income from continuing operations

 

$

(1,304

)

$

3,384

 

Discontinued operations

 

 

490

 

Net (loss) income

 

$

(1,304

)

$

3,874

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic and diluted

 

14,053,362

 

13,982,164

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,182

)

$

3,461

 

Other comprehensive income:

 

 

 

 

 

Net unrealized (loss) gain on available-for-sale securities

 

(23

)

377

 

Unrealized gain on derivative instruments

 

11

 

 

Other comprehensive (loss) income

 

(12

)

377

 

Comprehensive (loss) income

 

(2,194

)

3,838

 

Comprehensive income (loss) attributable to non-controlling interests

 

2

 

 

Comprehensive (loss) income attributable to common shareholders

 

$

(2,192

)

$

3,838

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

Three Months Ended December 31, 2012

 (Unaudited)

(Dollars in thousands, except share data)

 

 

 

Shares of
Beneficial
Interest

 

Additional
Paid-In
Capital

 

Accumulated
Other
Comprehensive
Income

 

Accumulated
Deficit

 

Non-
Controlling
Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2012

 

$

40,420

 

$

165,258

 

$

356

 

$

(72,585

)

$

13,569

 

$

147,018

 

Restricted stock vesting

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense — restricted stock

 

 

 

193

 

 

 

 

 

 

 

193

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

2,894

 

2,894

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

(397

)

(397

)

Net loss

 

 

 

 

 

 

 

(1,304

)

(878

)

(2,182

)

Other comprehensive loss

 

 

 

 

 

(12

)

 

 

 

 

(12

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(2,194

)

Balances, December 31, 2012

 

$

40,420

 

$

165,451

 

$

344

 

$

(73,889

)

$

15,188

 

$

147,514

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Thousands)

 

 

 

Three Months Ended
December 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(2,182

)

$

3,461

 

 

 

 

 

 

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Recovery of previously provided allowances

 

(422

)

(7

)

Amortization and depreciation

 

1,683

 

264

 

Amortization of deferred fee income

 

(333

)

(320

)

Amortization of restricted stock

 

193

 

210

 

Gain on sale of real estate assets from discontinued operations

 

 

(490

)

Gain on sale of available-for-sale securities

 

 

18

 

Gain on sale of loan

 

 

(3,192

)

Equity in (loss) earnings of unconsolidated joint ventures

 

(61

)

75

 

Distribution of earnings of unconsolidated joint ventures

 

45

 

123

 

Change in straight-line rent

 

3

 

12

 

Increases and decreases from changes in other assets and liabilities:

 

 

 

 

 

(Increase) decrease in interest and dividends receivable

 

(44

)

243

 

(Increase) decrease in prepaid expenses

 

(406

)

178

 

Decrease in prepaid interest

 

814

 

 

Increase (decrease) in accounts payable and accrued liabilities

 

376

 

(204

)

(Increase) decrease in deferred costs

 

(152

)

13

 

Increase (decrease) in security deposits and other receivable

 

567

 

(15

)

Other

 

214

 

(2

)

Net cash provided by operating activities

 

295

 

367

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Collections from real estate loans

 

8,657

 

51,682

 

Additions to real estate loans

 

(42,818

)

(25,457

)

Loan loss recoveries

 

422

 

7

 

Additions to real estate properties

 

(57,400

)

 

Net costs capitalized to real estate owned

 

(8,791

)

(792

)

Net change in restricted cash – construction holdbacks

 

5,655

 

 

Collection of loan fees

 

877

 

625

 

Proceeds from sale of real estate owned

 

6

 

507

 

Proceeds from sale of available-for-sale securities

 

 

556

 

Purchase of available for sale securities

 

 

(1,030

)

Distributions of capital from unconsolidated joint ventures

 

 

3,035

 

Net cash (used in) provided by investing activities

 

(93,392

)

29,133

 

 

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Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(Dollars in Thousands)

 

 

 

Three Months Ended
December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Increase in mortgages payable

 

46,010

 

4,282

 

Mortgage principal payments

 

(484

)

(70

)

Increase in deferred borrowing costs

 

(558

)

(381

)

Capital contributions from non-controlling interests

 

2,894

 

 

Capital distribution to non-controlling interests

 

(397

)

 

Repurchase of shares of beneficial interest

 

 

(767

)

Net cash provided by financing activities

 

47,465

 

3,064

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(45,632

)

32,564

 

Cash and cash equivalents at beginning of period

 

78,245

 

44,025

 

Cash and cash equivalents at end of period

 

$

32,613

 

$

76,589

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

2,316

 

$

109

 

Taxes paid

 

$

3

 

$

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

BRT REALTY TRUST AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2012

 

Note 1 — Organization and Background

 

BRT Realty Trust (“BRT” or the “Trust”) is a business trust organized in Massachusetts.  BRT (i) originates and holds for investment senior mortgage loans secured by commercial and multi-family real estate property in the United States, (ii) began participating, in fiscal 2012, as an equity investor in joint ventures that own and operate multi-family properties and (iii) owns and operates commercial and mixed use real estate assets, and in particular, development properties located in Newark, New Jersey.

 

The loans we originate generally have relatively high yields and are short-term or bridge loans with a duration ranging from six months to one year, with up to a one year extension in certain cases. Our policy is to lend at a floating rate of interest based on a spread over the prime rate, with a stated minimum rate, though we originate fixed rate loans as circumstances dictate.

 

The Trust generally contributes 80% of the equity in each multi-family property acquisition.

 

The Trust conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

 

Note 2 - Basis of Preparation

 

The accompanying interim unaudited consolidated financial statements as of December 31, 2012 and for the three months ended December 31, 2012 and 2011 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three months ended December 31, 2012 are not necessarily indicative of the results for the full year.  The balance sheet as of September 30, 2012 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

Certain items on the consolidated financial statements for the preceding period have been reclassified to conform with the current period’s presentation.

 

The consolidated financial statements include the accounts and operations of BRT Realty Trust, its wholly owned subsidiaries, and its majority owned or controlled real estate entities and its interests in variable interest entities in which the Trust is determined to be the primary beneficiary. Material intercompany balances and transactions have been eliminated.

 

RBH-TRB Newark Holdings LLC, referred to herein as the Newark Joint Venture, was determined to be a Variable Interest Entity (“VIE”) because the total equity investment at risk is not sufficient to permit it to finance its activities without additional subordinated financial support by its equity holders. The Trust was determined to be the primary beneficiary of this joint venture because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.

 

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Table of Contents

 

Note 2 - Basis of Preparation (Continued)

 

The Trust’s consolidated joint ventures that own multi-family properties were determined to be VIE’s because the voting rights of some equity investors are not proportional to their obligations to absorb the expected losses of the entity and their right to receive the expected residual returns. In addition, substantially all of the entity’s activities either involve or are conducted on behalf of the investor that has disproportionately few voting rights.

 

The Trust was determined to be the primary beneficiary of these joint ventures because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.

 

With respect to its unconsolidated joint ventures, in which (i) the Trust is primarily the managing member but does not exercise substantial operating control over these entities or the Trust is not the managing member and (ii) such entities are not VIE’s, the Trust has determined that such joint ventures should be accounted for under the equity method of accounting for financial statement purposes.

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates.

 

Note 3 - Equity

 

Common Share Dividend Distribution

 

During the quarter ended December 31, 2012, the Trust did not declare a dividend on its shares.

 

Restricted Shares

 

The Trust’s 2012 Incentive Plan, approved by its shareholders in January 2012, permits the Trust to grant stock options, restricted stock, restricted stock units, performance shares awards and any one or more of the foregoing.  A maximum of 600,000 shares may be issued pursuant to such plan.  An aggregate of 580,180 shares of restricted stock have been granted pursuant to the Trust’s 2003 and 2009 equity incentive plans (collectively, the “Prior Plans”) and had not vested as of December 31, 2012.  No awards had been granted under the 2012 Plan as of December 31, 2012, and no additional awards may be granted under the Prior Plans.  The restricted shares that have been granted under the Prior Plans vest five years from the date of grant and under specified circumstances, including a change in control, may vest earlier. For accounting purposes, the restricted shares are not included in the outstanding shares shown on the consolidated balance sheet until they vest, but are included in the earnings per share computation.   The estimated fair value of restricted stock at the date of grant is being amortized ratably into expense over the applicable vesting period. For the three months ended December 31, 2012 and 2011 the Trust recorded $193,000 and $210,000 of compensation expense respectively.  At December 31, 2012, $1,677,000 has been deferred as unearned compensation and will be charged to expense over the remaining weighted average vesting period of approximately 2.5 years.

 

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Table of Contents

 

Note 3 — Equity (Continued)

 

Per Share Data

 

Basic (loss) earnings per share attributable to holders of shares of beneficial interest was determined by dividing net (loss) income for the period by the weighted average number of common shares outstanding during each period.

 

Diluted (loss) earnings per share attributable to holders of shares of beneficial interest reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that shared in the earnings of the Trust.

 

Basic and diluted shares outstanding for the three months ended December 31, 2012 and 2011 were 14,053,362 and 13,982,164, respectively.

 

Note 4 - Real Estate Properties

 

A summary of real estate properties owned is as follows (dollars in thousands):

 

 

 

September 30,
2012
Balance

 

Additions

 

Costs
Capitalized
and
Improvements

 

Depreciation,
Amortization
and other
reductions

 

December 31,
2012
Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shopping centers/Retail

 

$

2,749

 

 

 

$

(26

)

$

2,723

 

Coop condo apartments

 

250

 

 

 

(7

)

243

 

Commercial / mixed use (a)

 

61,808

 

 

$

7,997

 

(153

)

69,652

 

Multi Family (b)

 

117,538

 

$

57,400

 

998

 

(1,104

)

174,832

 

Land

 

7,972

 

 

 

 

7,972

 

Total real estate properties

 

$

190,317

 

$

57,400

 

$

8,995

 

$

(1,290

)

$

255,422

 

 


a)  Represents the real estate assets of the Newark Joint Venture, a consolidated VIE which owns operating and development properties in Newark, NJ.  These properties contain a mix of office, retail space, charter schools and surface parking.  Certain of these assets are subject to  blanket  mortgages  aggregating $20,100,000,  held  by  the  Trust,  which  are  eliminated  in consolidation.  Several of the assets are also encumbered by other mortgages which are discussed in Note 8 Debt Obligations — Mortgages Payable.

 

b)  In the quarter ended December 31, 2012, the Trust purchased through consolidated joint ventures in which the Trust has an 80% or 90% equity interest, the following multi-family properties (dollars in thousands):

 

Location

 

Purchase
Date

 

Number
of
Units

 

Contract
Purchase
Price

 

Acquisition
Mortgage
Debt

 

BRT
Equity

 

Property
Acquisition

Costs

 

North Charleston, SC

 

10/4/12

 

208

 

$

21,500

 

$

17,716

 

$

4,410

 

$

213

 

Cordova, TN

 

11/15/12

 

464

 

25,450

 

19,248

 

6,220

 

386

 

Decatur, GA

 

11/19/12

 

212

 

10,450

 

8,046

 

3,396

 

231

 

 

 

 

 

884

 

$

57,400

 

$

45,010

 

$

14,026

 

$

830

 

 

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Note 5 - Real Estate Loans

 

Information relating to real estate loans, all of which are earning interest, is summarized as follows (dollars in thousands):

 

 

 

December 31, 2012

 

September 30, 2012

 

 

Property Type

 

Real Estate
Loans

 

Percent

 

Real Estate
Loans

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

$

31,283

 

45

%

$

35,096

 

95

%

Hotel

 

15,695

 

22

%

 

 

Parking facility

 

14,269

 

20

%

 

 

Retail

 

10,010

 

13

%

2,000

 

5

 

 

 

71,257

 

100

%

37,096

 

100

%

Deferred fee income

 

(1,056

)

 

 

(512

)

 

 

Real estate loans, net

 

$

70,201

 

 

 

$

36,584

 

 

 

 

At December 31, 2012, three separate borrowers had three loans outstanding that in the aggregate were in excess of 10% of total loans. Information regarding these loans are set forth in the table below (dollars in thousands):

 

 

 

Property Type

 

Gross Loan
Balance

 

% of
Gross

Loans

 

% of
Assets

 

State

 

Status

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-Family

 

$

14,734

 

20.7

%

3.4

%

GA

 

Performing

 

Parking Facility

 

$

14,269

 

20.0

%

3.3

%

NY

 

Performing

 

Hotels

 

$

14,100

 

19.8

%

3.3

%

NY

 

Performing

 

 

Substantially all of the Trust’s loan portfolio consists of senior mortgage loans secured by real properties, 57% of which are located in New York, 21% in Georgia, 10% in Maryland, and 12% in three other states.

 

On December 5, 2012, the Trust originated a loan in the amount of $21,174,000.  Gould Investors L.P., a related party, participated in this loan on a pari passu basis and holds a $6,905,000 interest in this loan.  The Trust retained a $14,269,000 interest in this loan.

 

Note 6 - Allowance for Possible Losses

 

At December 31, 2012 and September 30, 2012 the Trust did not have an allowance for possible loan losses.

 

Note 7 — Available-For-Sale Securities

 

Information regarding our available-for-sale securities is set forth in the table below (dollars in thousands):

 

 

 

December 31, 2012

 

September 30, 2012

 

Cost basis

 

$

789

 

$

789

 

Unrealized gains

 

477

 

499

 

Unrealized losses

 

(40

)

(39

)

Market value

 

$

1,226

 

$

1,249

 

 

10



Table of Contents

 

Note 7 — Available-For-Sale Securities (Continued)

 

Unrealized gains and losses are reflected as accumulated other comprehensive income in the accompanying consolidated balance sheets.

 

The Trust’s available-for-sale equity securities were determined to be Level 1 financial assets within the valuation hierarchy established by current accounting guidance, and the valuation is based on current market quotes received from financial sources that trade such securities.  All of the available-for-sale securities in an unrealized loss position are not considered impaired on an other than temporary basis because the Trust expects the value of these securities to recover and plans on holding them until at least such recovery.

 

Note 8 — Debt Obligations

 

Debt obligations consist of the following (dollars in thousands):

 

 

 

December 31, 2012

 

September 30, 2012

 

 

 

 

 

 

 

Line of credit

 

 

 

Junior subordinated notes

 

$

37,400

 

$

37,400

 

Mortgages payable

 

214,810

 

169,284

 

Total debt obligations

 

$

252,210

 

$

206,684

 

 

Line of credit

 

On June 22, 2011, the Trust, through a wholly owned subsidiary, entered into a senior secured revolving credit facility with Capital One, National Association.  The maximum amount that may be borrowed under the facility is the lesser of $25 million and the borrowing base.  The borrowing base ranges from 40% to 65% (depending on, among other things, the type of property secured by the eligible mortgage receivables pledged to the lender and the operating income of the related property) of eligible mortgage receivables.  Interest accrues on the outstanding balance at the greater of (i) 4% plus LIBOR and (ii) 5.50%. The facility matures June 21, 2014 and, subject to the satisfaction of specified conditions, the outstanding balance may be converted at the Trust’s option into an 18-month term loan.  The Trust has guaranteed the payment and performance of its subsidiary’s obligations under the facility.

 

On April 17, 2012, the facility was amended to allow the subsidiary to borrow for up to 90 days on an unsecured basis, a maximum of $10,000,000.

 

The facility, requires the Trust and the subsidiary to maintain or comply with, among other things, net worth and liquidity covenants, debt service and collateral coverage ratios and limits, with specified exceptions, and the incurrence of debt.

 

For the three months ended December 31, 2012 and 2011, interest expense, which includes fee amortization with respect to the facility, was $38,000 and $37,000, respectively.  At December 31, 2012 and September 30, 2012, there were no outstanding balances on this facility.

 

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Table of Contents

 

Note 8 — Debt Obligations (Continued)

 

Junior Subordinated Notes

 

At December 31, 2012 and September 30, 2012, the Trust’s junior subordinated notes had an outstanding principal balance of $37,400,000.  The interest rates on the outstanding notes is set forth in the table below:

 

Interest Period

 

Interest Rate

 

March 15, 2011 through July 31, 2012

 

3.00

%

August 1, 2012 through April 29, 2016

 

4.90

%

April 30, 2016 through April 30, 2036

 

Libor + 2.00

%

 

Interest expense relating to the junior subordinated notes for the three months ended December 31, 2012 and 2011 was $458,000 and $281,000, respectively.  Amortization of the deferred costs, which is a component of interest expense on borrowed funds, was $5,000 for both the three months ended December 31, 2012 and 2011.

 

Mortgages Payable

 

The Trust had the following obligations outstanding as of the dates indicated all of which are secured by the underlying real property (dollars in thousands):

 

 

Property

 

December 31,
2012

 

September 30,
2012

 

Rate

 

Maturity

 

Yonkers, NY

 

$

1,932

 

$

1,954

 

5.25

%

April 2022

 

Palm Beach Gardens, FL

 

45,200

 

45,200

 

3.78

%

April 2019

 

Melboune, FL

 

7,680

 

7,680

 

3.98

%

April 2019

 

Marietta, GA

 

7,443

 

6,462

 

6.50

%

February 2015

 

Lawrenceville, GA

 

4,687

 

4,687

 

4.49

%

March 2022

 

Collierville, TN

 

25,680

 

25,680

 

3.91

%

July 2022

 

North Charleston, SC

 

17,716

 

 

3.79

%

November 2022

 

Cordova, TN

 

19,248

 

 

3.71

%

December 2022

 

Decatur, GA

 

8,046

 

 

3.74

%

December 2022

 

65 Market St—Newark, NJ

 

900

 

900

 

7.00

%

January 2015

 

909 Broad St—Newark, NJ

 

6,084

 

6,132

 

6.00

%

August 2030

 

Teachers Village—Newark, NJ(1)

 

2,738

 

2,738

 

17

%

March 2013

 

Teachers Village—Newark, NJ(2)

 

22,748

 

22,748

 

5.50

%

December 2030

 

Teachers Village—Newark, NJ

 

4,250

 

4,250

 

3.46

%

February 2032

 

Teachers Village—Newark, NJ

 

979

 

988

 

2.00

%

February 2022

 

Teachers Village—Newark, NJ

 

994

 

1,380

 

2.50

%

February 2014

 

Teachers Village—Newark, NJ

 

1,832

 

1,832

 

 

(3)

February 2034

 

Teachers Village—Newark, NJ

 

15,700

 

15,700

 

Libor + 3.00

%

August 2019

 

Teachers Village—Newark, NJ

 

5,250

 

5,250

 

3.28

%

September 2042

 

Teachers Village—Newark, NJ

 

13,491

 

13,491

 

8.65

%

December 2023

 

Teachers Village—Newark, NJ

 

2,212

 

2,212

 

 

(4)

August 2034

 

 

 

$

214,810

 

$

169,284

 

 

 

 

 

 

12



Table of Contents

 

Note 8 — Debt Obligations (Continued)

 


(1)                                 As of December 31, 2012 and September 30, 2012, respectively, the Trust had guaranteed $685,000 of this mortgage obligation.

 

(2)                                 TD Bank has the right, in 2018, to require subsidiaries of the Newark Joint Venture to repurchase such debt. If such right is exercised, such subsidiaries will be required to refinance such debt. The stated interest rate is 5.5% per year; however, the United States Treasury Department is reimbursing the interest at the rate of 4.99% per year under the Qualified School Construction Bond program and accordingly, the effective rate of interest thereon until 2018 is 0.51% per year.

 

(3)                                 The debt is to be serviced in full by annual payment-in-lieu of taxes (“PILOT”) of $256,000 in 2013 increasing to approximately $281,000 at maturity. This obligation is not secured by real property.

 

(4)                                 The debt is to be serviced in full by annual PILOT payments of $311,000 in 2013 increasing to approximately $344,000 at maturity.

 

Note 9 — Deferred Income (New Markets Tax Credit Transaction)

 

On September 11, 2012 and February 3, 2012 special purpose subsidiaries of the Newark Joint Venture entered into transactions with affiliates of Goldman Sachs (“Goldman”) related to the Teacher’s Village project and received proceeds related to NMTC’s the project qualified for. The NMTC program was enacted by Congress to serve low-income and distressed communities by providing investors with tax credit incentives to make capital investments in those communities. The program permits taxpayers to claim credits against their Federal income tax for up to 39% of qualified investments.

 

Goldman contributed $16,400,000 and $11,200,000 to the projects through special-purpose entities created to effect the financing transaction and is entitled to receive tax credits against its qualified investment in the project over the next seven years. At the end of the seven years, the Newark Joint Venture subsidiaries have the option to acquire the special purpose entities for a nominal fee and it is anticipated that they will exercise this option.

 

Included in deferred income on the Trust’s consolidated balance sheet at December 31, 2012 and September 30, 2012 is $25,848,000 of the Goldman contribution, which is net of fees. This amount will be recognized into income when the obligation to comply with the requirements of the NMTC program as set forth in the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), is eliminated. Risks of non-compliance include recapture (i.e. reversal of the benefit of the tax credit and the related indemnity obligation of the Newark Joint Venture). The tax credits are subject to recapture for a seven year period as provided in the Code.

 

Costs incurred in structuring these transactions are deferred and will be recognized as an expense based on the maturities of the various mortgage financings related to the NMTC transaction.  At December 31, 2012 and September 30, 2012 these costs totaled $9.8 million and $10.1 million, respectively.

 

The Trust determined that these special purpose entities are VIE’s. The VIE’s ongoing activities, which include collecting and remitting interest and fees and NMTC compliance, were all considered in the design of the special purpose entities and are not anticipated to affect the economic performance during the life of the VIE’s.

 

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Table of Contents

 

Note 9 — Deferred Income (New Markets Tax Credit Transaction) (Continued)

 

Management considered the obligation to deliver tax benefits and provide guarantees to Goldman and the Trust’s obligations to absorb the losses of the VIE. Management also considered Goldman’s lack of a material interest in the underlying economics of the project. Management concluded that the Trust is the primary beneficiary and has therefore consolidated the VIE’s.

 

Note 10 - Segment Reporting

 

Management has determined that it operates in three reportable segments: (i) a loan and investment segment which includes the origination and servicing of our loan portfolio and its investments, (ii) a multi-family property segment which includes the ownership and operation of its multi-family properties; and (iii) a commercial and mixed use real estate segment which includes the operation and disposition of the Trust’s other real estate assets and in particular, the Newark Joint Venture.  Due to the addition of the multi-family properties in fiscal 2012 and 2013, the Trust changed the manner in which general and administrative expenses and general corporate debt is allocated to the segments.  Management determined it would be more appropriate to allocate these expenses based on the amount of equity invested rather than on the total assets of each segment as was previously done.  The prior period has been changed to reflect the new allocation of these expenses.

 

The following table summarizes our segment reporting for the periods indicated (dollars in thousands):

 

 

 

Three Months Ended December 31, 2012

 

 

 

Loan and
Investment

 

Multi-
Family
Real Estate

 

Other
Real Estate

 

Total

 

Rental and other revenues from real estate properties

 

 

$

4,950

 

$

690 

 

$

5,640 

 

Interest and loan fee income

 

$

1,879

 

––

 

––

 

1,879

 

Other income

 

442

 

 

 

290

 

732

 

Total revenues

 

2,321

 

4,950

 

980

 

8,251

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

357

 

1,487

 

1,102

 

2,946

 

Advisors fee, related party

 

186

 

134

 

54

 

374

 

General and administrative expenses

 

1,285

 

396

 

182

 

1,863

 

Property acquisition costs

 

 

878

 

 

878

 

Operating expenses relating to real estate properties

 

 

2,300

 

846

 

3,146

 

Depreciation and amortization

 

 

1,104

 

183

 

1,287

 

Total expenses

 

1,828

 

6,299

 

2,367

 

10,494

 

 

 

 

 

 

 

 

 

 

 

Total revenues less total expenses

 

493

 

(1,349

)

(1,387

)

(2,243

)

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated ventures

 

 

 

61

 

61

 

Income (loss) from continuing operations

 

493

 

(1,349

)

(1,326

)

(2,182

)

Plus: net loss attributable to non-controlling interests

 

 

111

 

767

 

878

 

Net income (loss) attributable to common shareholders

 

$

493

 

$

(1,238

)

$

(559

)

$

(1,304

)

 

 

 

 

 

 

 

 

 

 

Segment assets at December 31, 2012

 

$

102,255

 

$

183,485

 

$

146,603

 

$

432,343

 

 

14



Table of Contents

 

Note 10 -Segment Reporting (Continued)

 

The following table summarizes our segment reporting for the periods indicated (dollars in thousands):

 

 

 

Three Months Ended December 31, 2011

 

 

 

Loan and
Investment

 

Real
Estate

 

Total

 

 

 

 

 

 

 

 

 

Interest and loan fee income

 

$

2,252

 

 

$

2,252 

 

Rental and other revenues from real estate properties

 

––

 

$

768

 

768

 

Other income

 

134

 

––

 

134

 

Total revenues

 

2,386

 

768

 

3,154

 

 

 

 

 

 

 

 

 

Interest expense

 

275

 

192

 

467

 

Advisors fees, related party

 

84

 

87

 

171

 

General and administrative and other expenses

 

1,426

 

248

 

1,674

 

Operating expenses related to real estate properties

 

 

786

 

786

 

Depreciation and amortization

 

 

184

 

184

 

Total expenses

 

1,785

 

1,497

 

3,282

 

 

 

 

 

 

 

 

 

Total revenues less total expenses

 

601

 

(729

)

(128

)

 

 

 

 

 

 

 

 

Equity in (loss) earnings of unconsolidated ventures

 

(142

)

67

 

(75

)

Loss on sale of available-for-sale securities

 

(18

)

 

 

(18

)

Gain on sale of loan

 

3,192

 

 

3,192

 

Income (loss) from continuing operations

 

3,633

 

(662

)

2,971

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Gain on sale of real estate assets

 

 

490

 

490

 

 

 

 

 

 

 

 

 

Net income (loss)

 

3,633

 

(172

)

3,461

 

Plus net loss attributable to non-controlling interests

 

 

 

413

 

413

 

Net income attributable to common shareholders

 

3,633

 

241

 

3,874

 

 

 

 

 

 

 

 

 

Segment assets at December 31, 2011

 

$

129,867

 

$

68,435

 

$

198,302

 

 

15



Table of Contents

 

Note 11 — Fair Value of Financial Instruments

 

Financial Instruments Not Measured at Fair Value

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments that are not recorded at fair value on the consolidated balance sheets:

 

Cash and cash equivalents, restricted cash, accounts receivable (included in other assets), accounts payable and accrued liabilities:  The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair value due to the short term nature of these accounts.

 

Real estate loans:  The earning mortgage loans of the Trust which have variable rate provisions, based upon a margin over prime rate, have an estimated fair value which is equal to their carrying value assuming market interest rates between 12% and 12.5%.  The earning mortgage loans of the Trust which have fixed rate provisions have an estimated fair value of $11,000 greater than their carrying value assuming a market rate of interest of 12% which we believe reflect institutional lender yield requirements.

 

Junior subordinated notes: At December 31, 2012, the estimated fair value of the Trust’s junior subordinated notes is lower than their carrying value by approximately $20,300,000 based on a market interest rate of 6.30%.

 

Mortgages payable:  At December 31, 2012, the estimated fair value of the Trust’s mortgages payable is greater than their carrying value by approximately $2,530,000 assuming market interest rates between 3.12% and 17%.  Market interest rates were determined using rates which we believe reflect institutional lender yields requirements.

 

Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value assumptions.

 

Financial Instruments Measured at Fair Value

 

The Trust’s fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, there is a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.  The Trust does not currently own any financial instruments that are classified as Level 3.

 

16



Table of Contents

 

Note 11 — Fair Value of Financial Instruments (Continued)

 

Set forth below is information regarding the Trust’s financial assets measured at fair value as of December 31, 2012 (dollars in thousands):

 

 

 

Carrying and

 

Fair Value Measurements
Using Fair Value Hierarchy

 

 

 

Fair Value

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

Available-for-sale equity securities

 

$

1,226

 

$

1,226

 

 

Interest rate cap

 

5

 

 

$

5

 

Financial Liabilities:

 

 

 

 

 

 

 

Interest rate swap

 

$

93

 

 

$

93

 

 

Available-for-sale securities:  Fair values are approximated based on current market quotes from financial sources that track such securities. All of the available-for-sale securities in an unrealized loss position are equity securities and amounts are not considered to be impairment on an other than temporary basis because the Trust expects the value of these securities to recover and plans on holding them until at least such recovery occurs.

 

Derivative financial instrument:  Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities.  At December 31, 2012, this derivative is included in accounts payable and accrued liabilities on the consolidated balance sheet.

 

Although the Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparty.  As of December 31, 2012, the Trust assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Trust determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

 

Note 12 — Derivative Financial Instruments

 

Cash Flow Hedges of Interest Rate Risk

 

The Trust’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Trust primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Trust making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income on our consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  In March 2012, the Trust entered into an interest rate swap agreement used to hedge the variable cash flows associated with existing variable-rate debt.

 

17



Table of Contents

 

Note 12 — Derivative Financial Instruments (Continued)

 

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Trust’s variable-rate debt.

 

As of December 31, 2012, the Trust had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk (dollars in thousands):

 

Interest Rate Derivative

 

Notional

 

Rate

 

Maturity

 

 

 

 

 

 

 

 

 

Interest Rate Swap

 

$

1,954

 

5.25

%

April 1, 2022

 

 

The table below presents the fair value of the Trust’s derivative financial instrument as well as its classification on the consolidated balance sheets as of the dates indicated (amounts in thousands):

 

Liability Derivatives as of:

 

December 31, 2012

 

September 30, 2012

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Other Assets

 

$

5

 

Other assets

 

$

10

 

Accounts payable and accrued liabilities

 

$

93

 

Accounts payable and accrued liabilities

 

$

104

 

 

The following table presents the effect of the Trust’s derivative financial instrument on the consolidated statements of comprehensive (loss) income for the three months ended December 31, 2012 (dollars in thousands):

 

 

 

Three Months Ended
December 31, 2012

 

Amount of gain recognized on derivative in Other Comprehensive Income

 

$

2

 

Amount of loss reclassified from Accumulated Other Comprehensive Income into Interest Expense

 

$

(9

)

 

No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Trust’s cash flow hedges during the three months ended December 31, 2012.  During the twelve months ending December 31, 2013, the Trust estimates an additional $36,000 will be reclassified from other comprehensive income as an increase to interest expense.

 

Credit-risk-related Contingent Features

 

The agreement between the Trust and its derivatives counterparty provides that if the Trust defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Trust could be declared in default on its derivative obligation.

 

As of December 31, 2012, the fair value of the derivative in a net liability position, which includes accrued interest, but excludes any adjustment for nonperformance risk related to this agreement, was $93,000.  As of December 31, 2012, the Trust has not posted any collateral related to this agreement.  If the Trust had been in breach of this agreement at December 31, 2012, it could have been required to settle it obligations thereunder at its termination value of $93,000.

 

18



Table of Contents

 

Note 13 — New Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASC”) No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This update provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy. This update was effective for the Trust’s interim and annual reporting beginning January 1, 2012 and did not have a material impact on its financial condition, results of operations, or disclosures.

 

In June 2011, the FASB issued ASC No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This update requires the presentation of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. This update was effective for the Trust’s interim and annual reporting beginning on January 1, 2012, and did not have a material impact on its financial condition, results of operations, or disclosures.

 

Note 14 — Subsequent Events

 

Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of December 31, 2012 that warrant additional disclosure, have been included in the notes to the consolidated financial statements

 

19



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

With the exception of historical information, this report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended.  We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may”, “will”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions or variations thereof.  Forward-looking statements involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements.  Investors are cautioned not to place undue reliance on any forward-looking statements and are urged to read “item 1A Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2012.

 

Overview

 

We are a real estate investment trust, also known as a REIT. We operate in three business segments: real estate lending, ownership and operation of multi-family properties, and ownership and operation of other real estate assets.

 

Our lending activities involve originating and holding for investment senior mortgage loans secured by commercial and multi-family real estate property in the United States. Revenues are generated from the interest income (i.e., the interest borrowers pay on our loans) and to a lesser extent, loan fee income generated on the origination and extension of loans and investment income from securities transactions.

 

Our multi-family activities derive revenues primarily from tenant rental payments. We commenced these activities in 2012 as we identified a demand for equity capital in this sector. Generally, these activities involve our investment of 80% of the equity in a joint venture that acquires a multi-family property. Our multi-family property activities are complementary to our loan origination activities in that we address the funding needs of multi-family real estate investors by providing them with access to both equity capital and debt financing.

 

Our ownership and operation of other real estate assets is comprised principally of the activities of the Newark Joint Venture and to a lesser extent, the ownership and operations of various real estate assets located in New York and Florida. The Newark Joint Venture is engaged in the development of properties in downtown Newark, NJ. The properties are to be developed for educational, commercial, retail and residential use. The Newark Joint Venture is currently developing a project known as “Teachers Village”—the project currently involves five buildings, in various stages of construction and pre-construction, which are to be used for charter schools, retail space and residential units. The venture is currently unprofitable and it is anticipated that the activities will continue to be unprofitable at least until the Teacher’s Village is constructed and reasonable occupancy levels achieved. The venture requires substantial third party funding (including tax credits and financing provided by governmental authorities) for its development activities—no assurance can be given that sufficient funding will be available and even if sufficient funding is obtained and construction completed, that such development activities will ever by profitable to us.

 

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The following table sets forth (i) the impact of these lines of business on our total revenues and net income attributable to common shareholders for the periods indicated and (ii) our total assets applicable to each segment for the periods indicated (dollars in thousands):

 

 

 

Three Months Ended December 31,

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net Income
(Loss)
Attributable

 

 

 

Net Income
(Loss)
Attributable

 

Segment Assets at

 

 

 

Total

 

to Common

 

Total

 

to Common

 

December 31,

 

 

 

Revenues

 

Shareholders

 

Revenues

 

Shareholders

 

2012

 

2011

 

Loan and investment

 

$

2,321

 

$

493

 

$

2,386

 

$

3,633

 

$

102,252

 

$

129,867

 

Multi-family real estate

 

4,950

 

(1,238

)

 

 

183,485

 

 

Other real estate

 

980

 

(559

)

768

 

241

 

146,603

 

68,435

 

 

Net income attributable to common shareholders decreased by $5.2 million or 133.7% from $3.9 million in the three months ended December 31, 2011 to a loss of $1.3 million in the three months ended December 31, 2012. The decrease is due primarily to the inclusion (i) in the quarter ended December 31, 2011 of a $3.2 million gain on the sale of a loan in our loan and investment segment and a $490,000 gain on the sale of a property in our other real estate segment and (ii) in the quarter ended December 31, 2012,  a $1.24 million loss sustained in our multi- family property segment.

 

Contributing to the net loss sustained in our multi-family activities were, among other things, property acquisition costs of $878,000  with respect to the three multi-family properties acquired in the current fiscal quarter and a fourth property which has not yet closed and $1.1 million of non-cash depreciation and amortization expense. Depreciation and amortization expense will continue to negatively impact the operating results of our multi-family property segment.

 

The following highlights our activities during the three months ended December 31, 2012 and our financial condition as of such date:

 

·                  we acquired three multi-family properties with an aggregate of 884 units for an aggregate purchase price of $57.4 million (excluding acquisition costs of $830,000 and including an aggregate of $45.5 million of mortgage debt);

 

·                  we originated $42.8 million of mortgage loans in the first three months of fiscal 2013 compared to $25.5 million in the first three months of fiscal 2012;

 

·                  at December 31, 2012, our net loan portfolio totaled $70.2 million - all of the loans in the portfolio are performing; and

 

·                  at December 31, 2012 we had cash and cash equivalents and available-for-sale securities of $33.8 million.

 

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Results of Operations — Three months ended December 31, 2012 compared to the three months ended December 31, 2011

 

Revenues

 

The following table compares our revenues for the periods indicated:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

December 31,

 

Increase

 

%

 

(Dollars in thousands):

 

2012

 

2011

 

(Decrease)

 

Change

 

Interest and fees on real estate loans

 

$

1,879

 

$

2,252

 

$

(373

)

16.6

%

Rental and other revenue from real estate properties

 

5,640

 

768

 

4,872

 

634.9

%

Recovery of previously provided allowances

 

422

 

7

 

415

 

N/A

 

Other income

 

310

 

127

 

183

 

145.4

%

Total revenues

 

$

8,251

 

$

3,154

 

$

5,097

 

161.5

%

 

Interest and fees on real estate loans.  The decrease is due to a $20.2 million decrease in the weighted average balance of earning loans outstanding which resulted in a decline of $631,000 in interest income.  Though we originated in excess of $42 million of new loans in the first quarter of 2013, the average weighted balance of our loan portfolio declined primarily because such loans were originated towards the end of the quarter.  The decrease was partially offset by a $179,000 increase in interest income resulting from an increase in the weighted average interest rate on the portfolio from 11.46% to 12.67% and a $78,000 net increase in loan fee income.  The increase in the interest rate on the portfolio was due to the payoff of a lower interest rate loan.  Loan fees increased due to amortization of loan fees resulting from a larger loan portfolio and fees recognized on expired commitments; the loan fee increase was partially offset by a decline in extension and other fees.

 

Rental and other revenue from real estate properties.  The increase is primarily due to the inclusion of $3.68 million of rental revenue from five multi-family residential properties we acquired in fiscal 2012 and $1.27 million of rental revenue from three multi-family properties acquired in the first quarter of fiscal 2013.  The increase was partially offset by an approximate $68,000 decline in rental revenue from reduced occupancy at our Newark Joint Venture properties.  These are developments sites and accordingly, leasing space at such properties is difficult.

 

Recovery of previously provided allowances. The increase is due to the inclusion of $419,000 recovery relating to a loan charged off in a prior period.

 

Other income. The increase is the result of a U.S. Treasury subsidy which covers approximately 90% of the interest payments with respect to qualified school construction bonds (“QSCB’s”) with a principal amount of approximately $22.7 million issued by the Newark Joint Venture. We anticipate this subsidy, in the annual amount of approximately $1.2 million, will continue until at least 2018.

 

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Expenses

 

The following table compares our expenses for the periods indicated:

 

 

 

Three Months Ended
December 31,

 

Increase

 

%

 

(Dollars in thousands)

 

2012

 

2011

 

(Decrease)

 

Change

 

Interest expense

 

$

2,946

 

$

467

 

$

2,479

 

530.6

%

Advisor’s fees, related party

 

374

 

171

 

203

 

118.4

%

General and administrative

 

1,863

 

1,674

 

189

 

11.2

%

Property acquisition costs

 

878

 

 

878

 

N/A

 

Operating expenses relating to real estate properties

 

3,146

 

786

 

2,360

 

300.3

%

Depreciation and amortization

 

1,287

 

184

 

1,103

 

601.2

%

Total expenses

 

$

10,494

 

$

3,282

 

$

7,212

 

219.7

%

 

Interest expense. The increase is primarily attributable to the following factors: (i) $1.0 million is due to mortgages on the five multi-family residential properties acquired in fiscal 2012 and $297,000 on three properties acquired in the first quarter of fiscal 2013; (ii) $918,000 is due to the Newark Joint Venture’s financing transactions; and (iii) $178,000 is due to the increase in August 2012 of the interest rate on the junior subordinated notes from 3% to 4.9%.  We estimate that interest expense in fiscal 2013 attributable to our eight multi-family properties, the Newark Joint Venture’s 2012 financings and the junior subordinated notes, will be approximately  $12.2 million. Capitalized interest was $604,000 and $311,000 for the periods ended December 31, 2012 and 2011, respectively.

 

Advisor’s fees, related party.  The fee is calculated based on invested assets which increased primarily due to the purchase of eight multi-family properties over the last twelve months.

 

Property acquisition costs. The costs are primarily associated with the purchase of three multi-family properties in the quarter ended December 31, 2012. Such costs included acquisition fees to our joint venture partners, brokerage fees, and legal, due diligence and other transactional costs and expenses.

 

General and administrative.  The increase is due primarily to increased professional fees associated with recent joint venture activities, litigation relating to the recovery of funds on a loan that was charged off in a prior fiscal year and to the inclusion of the $50,000 fee payable quarterly to the chairman of our board of trustees.

 

Operating expenses relating to real estate properties.  The increase is due primarily to the acquisition, in the previous twelve months, of eight multi-family residential properties.

 

Depreciation and amortization.  The increase is due primarily to the acquisition in the previous twelve months.

 

Other revenue and expense items

 

Equity in earnings (loss) of unconsolidated ventures.  The increase is due primarily to the inclusion of  a loss in the quarter ended December 31, 2011 from the write off of capitalized costs related to a joint venture that ceased operations in November 2011.

 

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Table of Contents

 

Gain on sale of loan. In October 2011, pursuant to a federal bankruptcy court approved plan of reorganization, we and our loan participant sold the rights to a loan, for net proceeds of approximately $23.5 million.  We recognized a $3.2 million gain on the sale, representing our 50% interest in this loan.

 

Discontinued operations

 

In the three months ended September 30, 2011, discontinued operations consisted of gain on the sale of one vacant cooperative apartment in New York City.  There were no discontinued operations in the quarter ended December 31, 2012.

 

Liquidity and Capital Resources

 

We require funds to acquire properties, fund loan originations, repay borrowings, pay operating expenses, and with respect to the Newark Joint Venture, to fund operating losses and a third development phase.  Our current sources of liquidity consist primarily of our cash and up to $10 million that we may borrow on an unsecured basis for up to 90 days pursuant to our credit facility. At December 31, 2012, our liquidity (excluding $49.6 million in restricted cash-construction holdback which is to be used by the Newark Joint Venture) was approximately $42.6 million.  At January 31, 2012 our liquidity was approximately $31 million, which consisted of $21 million of cash and $10 million available on the credit facility.

 

Multi-Family Residential Properties

 

We anticipate that the debt service that becomes payable during 2013 through 2015 for our eight multi-family properties and the operating expenses of these properties will be funded from the rental revenues generated therefrom. The mortgage debt with respect to these properties is non-recourse to (i) the joint venture that owns the property, subject to standard carve-outs and (ii) us and our subsidiary holding our interest in the joint venture.

 

Newark Joint Venture

 

The Newark Joint’s Venture’s current capital resource and liquidity requirements through September 2015 are primarily construction and related costs and debt service associated with the first and second phases of the Teacher’s Village project which contemplate the construction of five buildings. We anticipate that the construction and associated costs for these phases of the Teachers Village project will be funded by the $49.6 million reflected as restricted cash-construction holdback on our consolidated balance sheet, which funds are to be released to the venture from time to time upon satisfaction of specified construction and permitting related conditions.

 

We anticipate that the debt service payable from 2013 through 2015 and the estimated operating expenses for such years for the first and second phase of the Teacher’s Village project, will be paid from existing interest reserves, a US Treasury interest subsidy on the qualified school construction bonds, New Jersey tax credits, the refinancing of approximately $ 3.6 million of short term debt, funds generated from the operations of such properties and capital contributions from the members of the Newark Joint Venture.  After giving effect to the $2.4 million of rental revenues to be generated from the in-place lease agreements with the three charter schools and a day-care center, the Newark Joint Venture estimates that it will require at least an additional $7 million in rental payments from retail tenants and residential tenants at the Teachers Village buildings to cover debt service and operating expenses for 2014 and 2015. While the Newark Joint Venture has commenced marketing the retail space at these buildings, there is no assurance that the venture will be able to lease such space and that if leased, the rental payments therefrom and from rental revenues from the residential units (for which marketing has not commenced) will be sufficient to cover debt service and operating expenses.

 

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Table of Contents

 

The Newark Joint Venture is currently seeking up to $30 million in financing from public and private sources to fund the third phase of the Teachers Village project.   This third phase contemplates the construction of up to three additional buildings containing a mix of residential and retail space.  No assurance can be given that the Newark Joint Venture will obtain the necessary financing on acceptable terms or if such financing is obtained, that such project will be profitable for us.

 

We believe we have sufficient funds to meet our operating expenses in 2013 and to fund any capital contributions required by the general operations of Newark Joint Venture and our multi-family properties. We also have funds available to engage in our lending business and to make property acquisitions. The extent of our ability to engage such activities is limited by our available cash and, in the case of loan origination activities, by our (i) ability to sell participating interests in such loans and (ii) ability or willingness to use our credit facility, and in the case of our multi-family property activities, the availability of mortgage debt to finance such acquisitions

 

Credit Facility

 

A subsidiary of ours is able, pursuant to a senior secured revolving credit facility, to borrow up to an aggregate of $25 million to originate loans. The subsidiary may borrow (i) on an unsecured basis, $10 million for up to 90 days and (ii) on a secured basis, up to the lesser of $25 million and the borrowing base. The borrowing base is generally equal to 40% to 65% (depending on, among other things, the type of property secured by eligible mortgage receivables acceptable to the lender as collateral and the operating income of the related property) of such receivables. Interest accrues on the outstanding balance at the greater of (i) 4% plus LIBOR and (ii) 5.50%. The facility matures June 21, 2014 and, subject to the satisfaction of specified conditions, the outstanding balance may be converted at our option into an 18 month term loan. We have guaranteed the payment and performance of our subsidiary’s obligations under the facility. The credit facility, among other things, requires us to maintain specified net worth and liquidity levels, requires the subsidiary to maintain specified debt service coverage and collateral coverage ratios, and limits our and our subsidiary’s ability to incur debt.

 

At each of December 31, 2012 and January 31, 2013, no amount was outstanding under the facility and the maximum amount we could borrow was $10 million for 90 days.

 

Cash Distribution Policy

 

At December 31, 2012, we had approximately $56 million of net operating loss carry forwards available to offset future income. It therefore is highly unlikely that we will pay or, to maintain our REIT status, be required to pay any dividend in 2013 and for several years thereafter.

 

Off Balance Sheet Arrangements

 

None.

 

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Table of Contents

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risks

 

Our primary component of market risk is interest rate sensitivity.  Our interest income is subject to changes in interest rates.  We seek to minimize these risks by originating loans that are indexed to the prime rate, with a stated minimum interest rate.   At December 31, 2012, approximately 86% the principal amount of our outstanding mortgage loans were comprised of variable rate based loans tied to  the prime rate and with a stated minimum interest rate.   When determining interest rate sensitivity, we assume that any change in interest rates is immediate and that the interest rate sensitive assets and liabilities existing at the beginning of the period remain constant over the period being measured.  We assessed the market risk for our variable rate mortgage receivables as of December 31, 2012 and believe that a one percent increase in interest rates would have a positive annual effect of approximately $430,000 on income before taxes and a one percent decline in interest rates would have no annual effect on income before taxes because all of our variable rate loans have a stated minimum rate.

 

As of December 31, 2012, we had one interest rate swap agreement outstanding. The fair value of our interest rate swap is dependent upon existing market interest rates and swap spreads, which change over time. At December 31, 2012, if there had been a 1% increase in forward interest rates, the fair market value of the interest rate swap and net unrealized loss on derivative instrument would have increased by approximately $123,000. If there had been a 1% decrease in forward interest rates, the fair market value of the interest rate swap and net unrealized loss on derivative instrument would have decreased by approximately $120,000. These changes would not have any impact on our net income or cash.

 

Our mortgage debt (excluding a mortgage subject to an interest rate swap agreement) and our junior subordinated notes, bears interest at fixed rates and accordingly, the effect of changes in interest rates would not impact the amount of interest expense that we incur under such indebtedness.

 

As of December 31, 2012, 57% of our loan portfolio was secured by properties located in the New York metropolitan area, 21% in Georgia, 10% in Michigan and 12% in other states and we are therefore subject to risks associated with the economics in these areas.

 

Item 4.  Controls and Procedures

 

As required under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer, Senior Vice President-Finance and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2012.  Based upon that evaluation, the Chief Executive Officer, Senior Vice President-Finance and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2012 are effective.

 

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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Table of Contents

 

Part II

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

In September 2011, we announced that our Board of Trustees had authorized a share buyback plan pursuant to which we may, through September 2013, expend up to $2,000,000 to acquire our common shares.  There were no share purchases effected in the quarter ended December 31, 2012.

 

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Table of Contents

 

Item 6.  Exhibits

 

Exhibit
 No.

 

Title of Exhibits

31.1

 

Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Senior Vice President—Finance pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.3

 

Certification of Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Senior Vice President—Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.3

 

Certification of Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Definition Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

BRT REALTY TRUST

(Registrant)

 

 

February 7, 2013

/s/ Jeffrey A. Gould

 

Jeffrey A. Gould, President and

 

Chief Executive Officer

 

 

 

 

February 7, 2013

/s/ George Zweier

 

George Zweier, Vice President

 

and Chief Financial Officer

 

(principal financial officer)

 

29